“Not so long ago, the notion of the European Central Bank handing out money to governments or directly to citizens – so-called “helicopter money” drops – would have seemed outlandish. But today a surprising number of mainstream economists and centrist politicians are endorsing the idea of monetary financing of stimulus measures in different form.” (Laura Tyson and Eric Labave, Jumpstarting Europe’s Economy, June 26, 2016)

The global economy has barely improved since the Great Recession ended in 2009.

Despite the fact that it has long been recognized that when economies are in a liquidity trap and are facing price deflation, fiscal stimulus is the most effective policy tool, the actual fiscal response was often too weak, particularly in austerity prone Europe. Because many of the G7 governments mistakenly turned to fiscal austerity, the monetary authorities were forced by circumstances to adopt a number of unconventional offsetting measures.

The unconventional measures included quantitative easing, extremely low interest rates, and in some cases negative interest rates. Helicopter money is an even more unconventional monetary policy idea that has recently popped up as a supplement to quantitative easing (QE) when interest rates are close to zero and the economy faces another major downturn.

The concept of helicopter money was first made popular by the American economist Milton Friedman in 1969. According to Friedman, a helicopter flies over this community and drops dollar bills  from the sky, which is, of course, hastily collected by members of the community. Furthermore, Friedman supposes that everyone is convinced that this is a unique event which will never be repeated. The basic principle is that if a central bank wants to raise inflation and output in an economy that is running substantially below potential, one of the most effective tools would be simply to give everyone direct money transfers. According to its supporters, helicopter money would be a more efficient way to increase aggregate demand (i.e. consumer spending and capital investment), especially in a liquidity trap, when central banks have reached the so-called “zero lower bound.”

Economists use the term 'helicopter money' to refer to two very different types of policies. The first set of policies emphasizes the “permanent” monetization of government budget deficits. Given that central bank have been soaking up huge amounts of public debt in the United States, Europe and Japan, they are, so to speak, more than half way towards  monetization and all that remains is for a central bank to announce t hat it will never collect once the debt has matured. The second version involves the central bank making direct transfers to the private sector financed with base money, without the direct involvement of fiscal authorities. This has also been sometimes called a citizens' dividend.

The fact that the helicopter money concept has even surfaced in the popular press indicates how worried economists are about the global economy. Too bad governments faced with moribund economies are unwilling or are unable to turn to a policy which would work—namely, a coordinated, large scale fiscal stimulus packages.  

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Arthur Donner is a Toronto-based economic consultant with a lively interest and involvement in economic policy issues. Arthur has the ability to make complicated economic issues understandable to widely different audiences. Consequently, his career has moved between universities, governments and the private sector. Arthur studied economics and finance at the University of Manitoba where he earned a BA (Hons.) and MA degrees, and he received his PhD at the University of Pennsylvania in 1968.